At the Inside ETFs 2017 Conference, we got a chance to talk to William Belden, head of ETF business development at Guggenheim Investments. This conversation features Belden’s take on Smart Beta and future ETF industry trends. We also got a sneak preview into the different suites of ETF products offered by Guggenheim and their unique lineup of BulletShares fixed income ETFs.
ETFdb.com: Can you tell us a little bit about yourself and your role at Guggenheim?
William Belden (W.B.): I am the head of ETF business development at Guggenheim Investments. I’m responsible for the support of our distribution of ETFs. The key part of the product development process that revolves around managing our index partner relationships came from market relationships. I have salespeople who were calling on the ETF strategist and model provider community. That’s what my role is within the ETF business at Guggenheim.
We’re a $32 billion-dollar ETF provider, which puts us eighth domestically in the U.S. as far as assets under management. As you can see by our products, we’re largely grouped by suites. We have just under 80 ETFs with different versions of several key themes including 18 defined mature ETFs in our BulletShares suite. These behave a lot like bonds; they mature. So, when you’re entering a period of rising rates, one of the most attractive elements of any product on the fixed income side is getting it back, or getting something back, at the end of the life cycle. At the end of the individual bond, you get the principal back. In BulletShares, you get the NAV back at the end of that particular calendar year.
Furthermore, we have 15 equal-weight strategies and some pure-style strategies, among others. We seek to feature ideas that resonate, or travel well, then we tailor in a few other individual ornate strategies as well. We’re fairly diverse as a product sponsor.
Smart Beta Deep Dive
ETFdb.com: I notice that most, if not all, of your ETFs are Smart Beta, and everyone has a different definition of Smart Beta. Some call it “Strategic Beta” or “Additional Beta.” How do you define Smart Beta?
W.B.: Our definition of Smart Beta is anything that breaks the price component of weighting methodology in portfolio construction. So pricing wise – price being the driving factor of market-cap-weighted strategy – we believe anything that deviates from that fits within the Strategic Beta, or Smart Beta, space.
ETFdb.com: What do you think are the benefits or risks of Smart Beta investing?
W.B.: We haven’t fully jumped on the Smart Beta term. Frankly, we’ve gone back and forth a little bit on Strategic Beta and Smart Beta. But we’d like to call ourselves the first sponsor in the Smart Beta space with S&P 500 Equal Weight (RSP ) back in 2003, one of the first non-market-cap-weighted ETFs.
The risks that come with Smart Beta are that they behave differently than what people have been accustomed to. Having said that, it’s not that we’re against market-cap weighting, we certainly have market-cap weighting in some of our strategies. But depending on what you’re seeking to achieve in terms of your portfolio investment objective, that Smart Beta-based strategy can give you a better, or improved, risk-return profile relative to market-cap-weighted strategies.
If you’re buying S&P 500 ETF Equal Weight (RSP ), you’re getting what we call ‘the potential to outperform.’ History has shown that you outperform, but that typically comes with a marginally higher volatility profile than that of a market-cap-weighted strategy. If you’re willing to accept that marginally higher level of volatility in return for the opportunity to get what has historically been a higher return, then it’s a good fit for you.
ETFdb.com: In terms of how clients and advisors are using Smart Beta ETFs, do you see them as more of a strategic application, or are they more tactical?
W.B.: I think more refinement around Smart Beta is the best answer to that question. What the product is designed to achieve when Smart Beta is the term or Strategic Beta is being used is better than something else. If you’re doing a sector rotation strategy, we would position equal-weighted sectors against market-cap-weighted sectors to show that you can provide yourself with a better profile for that sector-rotation strategy by utilizing an equal-weight approach.
Equal weighting, as an example, works better in some sectors than it does in others. But we want to offer the suite because, tactically speaking, you may want to use it on a tactical basis that might be aligned with what’s doing well in the market. The Trump election is a perfect example of that, in which the market rally was clearly driven and focused on sectors that were believed to be in the position to outperform in a Trump administration. So financials, industrials and, I think, materials were doing really well, while technology didn’t perform all that well on the heels of that. I use this as an example to avoid the trite response of “it depends.” However, the real answer is “it depends.”
I think when you use broad market equal-weight strategies, or broad market Smart Beta strategies, they lend themselves to a more strategic application as opposed to a tactical one. Again, I’ll go back to RSP. RSP tends to deliver the bulk of its outperformance in a rising market. Having said that, over time, you look at the statistics on RSP and over any ten-year period of RSP, it has outperformed the S&P 500 100% of the time on a monthly return series. It has very attractive statistics for seven-, five-, three- and one-year periods too, but 100% of the time over a ten-year period it has outperformed. So, we like to think that aligns well with the core usage.
ETFdb.com: Given that kind of outperformance, what do you think is the future of Smart Beta?
W.B.: I think white space is diminishing but that more market rotation will prompt more definitions around winners and losers. Losers will fall off, and there will be a survivorship bias in Smart Beta. The stuff that ultimately doesn’t survive will be replaced with new and better strategies. Although I make the comment that white space is diminishing, there will be more white space when some of these strategies fall off and are replaced by others.
I do think that strategies are getting more sophisticated and that sponsors are trying to distinguish themselves against one another. So, you go from something simple like equal weighting to multi-factor strategies, which are getting more complex. Given that increased complexity, a need for education is only going to grow.
ETFdb.com: Speaking about the education theme, I know there are several segments in the Guggenheim product lineup, with 75 to 80 ETFs. So, how do you get the word out to investors and your clients? How important is ETF education in your efforts?
W.B.: I think we’re reminded of how important education is every day with the conversations we have. Frankly, it’s because the user base and adoption of ETFs is growing dramatically. In fact, we’re run into several advisors here at the conference who were talking about transitioning their businesses over to greater – or exclusive – use of ETFs, yet not necessarily knowing what that entails. It is imperative, after having been in this business now for 11 years, that there is still a huge constituency that is just starting to learn more about ETFs. Even institutional audiences are starting to learn more about ETFs.
We have a fairly large distribution force that we spend a lot of time educating. We have ETF 101-type sessions. We’re doing a little advertising and a decent chunk of PR is focused on engagements that help to spread the word.
ETFdb.com: Let’s talk about current events and geopolitical risk. You have Trump; you have Brexit; you have Italy, elections are coming up in France and Germany…a lot of things are happening in the next 12 months. What do you recommend to your clients in terms of navigating this geopolitical risk?
W.B.: I think diversification is one recommendation; we have a fairly diversified, global lineup. Our outlook is for a lot of uncertainty, which breeds volatility. Diversification is one thing that we’ve always harped on, and having a well-diversified portfolio is something that lends itself to managing risk much more effectively than over-concentrating our bets, which ironically is the same sort of thing we say when we talk about equal weighting. We think that, while there is an opportunity in the near term for risk assets to perform well, being more diversified rather than less – across not just geography, but also asset class – is beneficial to clients.
ETFdb.com: Speaking of diversification, the U.S. dollar continues to rise given the rising rate environment. Valuations are at all-time highs. The higher the markets rise, don’t they get riskier? If so, what would you recommend in terms of diversification? Would you recommend that people invest more in emerging markets and abroad?
W.B.: Yes, emerging markets in Europe have had an interesting return pattern, relative to domestic exposure. That goes back to what I was saying a moment ago. It’s like you ought to have something there at all times, and by “there”… fill in the blank. The valuations being high, or being stretched, are based on certain variables. If we are in a period of accelerating economic growth then those multiples won’t necessarily look as aggressive as they are.
Having said that, when do people start to see that growth actually realized? Because we’ve obviously been in an extremely slow growth period and, hence, multiples have grown. But if that pace of growth picks up then you’ll start to see more reasonable valuations applied. What happens between now and then is the question. This is where we predict volatility. There’s not going to be a straight line from “A” to “B.” “A” will get to “B,” but it’s probably going to be a bit of a bumpy road. Depending on how you position yourself, you can either benefit by being tactical in your exposure or you can be more strategic and just try to ride it out.
ETF Industry and Trends
ETFdb.com: We have two more questions on ETF trends in the ETF industry. The first question is on ETF fees. In recent months, you have seen a lot of issuers having a lot of fee cuts on some of their major ETFs; BlackRock, Vanguard, WisdomTree and Fidelity did it. In your opinion, where do you see this fierce price competition heading? Do you think these fees will continue to go lower and not only for the major ETFs? Or do you see that as more of a broad trend throughout the ETF space?
W.B.: You just rattled off sponsors, all of whom, maybe with the exception of WisdomTree, are active participants in what we call ‘the chief Beta space.’ So, where you’re leading with price is where the pricing has gotten the most aggressive. We, as a strategic Beta-oriented sponsor, haven’t been as exposed. Having said that, there is movement going on. We feel it, we see it, but it’s not as impactful as when it has been happening at the lowest end of the pricing spectrum.
Will fee cuts continue? The answer is yes. I think the pace and degree by which they continue is a little bit of a TBD. I think what you’re also seeing is a shifting distribution dynamic. What you saw happen in the 90s with mutual funds is beginning to happen now with ETFs. You’ll start to see distribution deals done. You’re actually starting to see it right now in a way that will inevitably serve as a bit of a buffer to dramatic price swings or, I should say, price cuts.
So again, I think the pacing is a little bit of a TBD, but it will continue to work its way into areas where we focus more. It will move its way into other areas of the market that haven’t seen as much progressive pricing, whether it be foreign securities or non-equity fixed-income type of securities. I think going back to my comment on whitespace and when people start feeling more challenged to innovate in strategic ways that they then go to price. But it’s good for the investor, and we’re fans of what’s good for the investor.
ETFdb.com: Final question. What are two or three trends you see happening in the ETF space over the next three to five years? How is Guggenheim, in your opinion, poised to take advantage of those trends?
W.B.: The definition of the prototypical ETF user is going to change a bit. You’ll find them becoming more varied in terms of the ways in which they utilize ETFs. Since usual adoption is going to grow a lot faster, fixed-income adoption is going to grow a lot. We’re believers in active fixed income in particular. So, we believe the active space, which has been slow to grow for a number of reasons, will increasingly see more advisors utilize active strategies.
You’re going to have lengthening in track records that will show evidence of whether managers have outperformed or not. Again, the concentration on fees from traditional managers will focus on other ways they can deliver their strategies. There will be a window in time when active is actually outperforming passive, and you’ll see a bit of a reversion to active usage. But, while we’re big believers in passive, there are pockets of time where active is outperforming, and you’ll see inflows going there.
The Bottom Line
Given all geopolitical and uncertain market environment, volatility is expected ahead. Investors should remain diversified globally. This diversification can be done with the ever-increasing product line-ups of ETFs. Given the increased number of sophisticated products coming to market and the increased adoption of ETFs, including Smart Beta, Mr. Belden believes that ETF education is much needed in the financial advisor industry.
ETFdb.com has previously conducted a Q&A with William Belden, where we talked about the Guggenheim Large Cap Optimized Diversification ETF (OPD ), which was launched in early 2016. You can find that Q&A with William Belden here and all Q&A interviews here.
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